Source: WSJ
Economists are roundly cheerful about China's worst quarterly economic performance in nearly 20 years.
The 6.1% year-to-year GDP growth in the first quarter -- way down from the double-digit growth levels of recent years -- does belie some encouraging signs for the economy.
Manufacturing output, up 8.3% year-to-year in March, is growing at a healthy clip again. A range of indicators, from rebounding car sales to faster fixed asset investment growth, all look positive.
In sum, a belief that the last three months represents the trough of China's slowdown has taken hold, with credit due to last autumn's $586 billion fiscal stimulus and a massive surge in lending from state-owned banks, mainly to state-owned enterprises.
Now the debate among economists is becoming more alphabetical.
Is this recovery V-shaped, with China set to return quickly to the high-level growth of recent years? Or is it more W-shaped, as a government spending-led recovery this year peters out and China's longer term structural issues resurface?
The risk in Beijing's spending-and-lending stimulus measures is of an eventual, large misallocation of resources.
That the state-owned sector is driving the current recovery is clear. There are two purchasing managers' indices in China: The one that reflects activity among state-owned enterprises is now in positive territory, while the private sector-weighted index -- calculated by CLSA Asia Pacific Markets -- is still contracting.
Optimists argue Beijing's stimulus spending via state companies will have a multiplier effect on the rest of the economy.
But the danger of crowding out potentially more efficient private-sector activity is high. In the absence of helpful external factors -- namely a resumption of Western demand for Chinese exports -- the government pump will continue to be the only thing preventing China's V-shaped recovery from turning W-shaped.
China's fiscal strength will give it leeway to keep money flowing into state enterprises and projects if need be -- Stimulus II, so to speak. But reliance on government spending isn't a long-term alternative.
